Budget 2018: How Arun Jaitley’s Circle Rate Move Will Impact Real Estate

The only time Finance Minister Arun Jaitley directly mentioned the word ‘real estate’ in his one-hour-fifty-minute Budget Speech on February 1 was in the context of circle rates.

“To minimise hardships in real estate transactions”, Jaitley proposed that no additional tax would need to be paid by sellers and buyers in case the difference between the transaction value and the fair value (based on the circle rate) of the property being sold does not exceed five per cent.

What does this change really mean for homebuyers and sellers, and the real estate market in general? Let’s find out:

The present mechanism

For the uninitiated, circle rates are the government-set prices below which a property cannot be registered. The rates vary from state to state, city to city and locality to locality. 

On property transactions, a buyer is responsible for paying stamp duty and registration charges while the seller has to pay capital gains tax. While there is a flat rate of 20 per cent of taxing capitals gains in case of a property is held for a period exceeding three years, stamp duty is decided on the basis of the circle rate in the area. In India, stamp duty charges vary between 4 and 10 per cent across states. 

In the sale of immovable assets, the actual transaction value (total consideration) or the circle rate value – whichever is higher – is adopted for the computation of tax on income from capital gains, business profits and other sources.

Sometimes, despite the same circle rate, there can be wide variations in transaction values of different properties in the same area – primarily because not every property commands the same premium. A property closer to a Metro station, for instance, would be more expensive than a property that is at a distance in the same locality.

For a variety of reasons – from the shape of the plot to the exact location of the property – some real estate units are even sold below the circle rate. However, tax and stamp duty computation for such transactions is done on the basis of the circle rate, which is higher in these cases. The difference between the transaction value and circle rate is taken as ‘income’ in the hands of the purchaser as well as the seller. 

The tax law 

If a property is sold below the circle rate, a double-taxation mechanism is applied to both buyer and seller on the differential amount under Section 50C, Section 43CA, and Section 56(2)(vii) of the Act. If a property is registered for, say, Rs 95 lakh while its worth according to the prevailing circle rate is Rs 1 crore, the buyer and the seller have to pay additional taxes on the differential value of Rs 5 lakh. 

Section 50C says that if a property is sold below the circle rate, the seller has to pay capital gains on the stamp duty value, and not the original consideration. 

Section 43CA of the Act states that such a property is treated as ‘stock in trade’. 

Section 56(2)(VII) says that if a buyer receives a property for a consideration less than its stamp duty value, and the difference is of over Rs 50,000, the difference would be treated as ‘income from other sources’ and taxed likewise. This section applies to individuals and Hindu Undivided Families. 

What has Jaitley changed in Budget 2018?

The finance minister has now said that “no adjustment” will be made in a case where the circle rate value does not exceed five per cent of the consideration. This means, after the proposal is approved by Parliament, in the event of a property being sold below the circle rate, the seller will not need to calculate his capital gains on the differential amount, and the buyer will not have to pay taxes on it. 

Suppose Shyam sells Ram a property for Rs 95 lakh while the stamp duty worth of the property is Rs 1 crore. In this case, Shyam will compute his capital gains on Rs 95 lakh, not Rs 1 crore. And Ram will not need to pay taxes on the differential amount of Rs 5 lakh.

The catch

Even as this is somewhat of a relief for real estate buyers and sellers, it must be noted that this benefit applies only if the difference between the circle rates and the transaction values is five per cent or less. This significantly caps the number of beneficiaries in India’s real estate market. 

"In property markets of Delhi and south Mumbai, the circle rates are higher than the market rates. Homebuyers and sellers in these locations are penalised in case the property is sold below the circle rate. This has led to a substantial fall in property sales in these locations. However, after the Budget 2018, no penalty will be levied if the market value of the property is five per cent lower than that of the circle rate. This comes as a sigh of relief for both the homebuyers and sellers in locations where the market price is lower than circle rate," says PropTiger.com's chief investment officer Ankur Dhawan.

However, BDO India Partner, real estate, Nidhi Seksaria in a PTI report said, "This may not be enough as the actual deviation of circle rates to prevailing market in many cases is as high as 30 per cent, crippling transactions". 

Besides, the benefit for the buyer is also capped, as only the taxation on the differential amount as ‘income from other sources’ has been waived. Since no amendment to the stamp duty Act has been proposed, he will continue to pay stamp duty on the circle rate value, even if the transaction value is lower.